China has fixed the exchange rate of its currency. That means that no matter what the relative value of the two currencies are, they exchange rate will be the same. China has fixed the rate artificially low, which means you can get more yuan then you should be able to. This makes Chinese products cheaper, and allows them to wipe out the competition around the world.
We do get cheaper prices on Chinese goods, but that means our firms can’t compete. Essentially, China is subsidizing its products, which violates free trade agreements, except I don’t believe we have one with China.
In China, everyone has a lower income, because essentially, the Chinese are giving us the reduction in prices out of their own pockets. They do this to try to improve employment, amongst other things.
We can’t compete, so we lose jobs. On the other hand, China has a pent-up demand from a middle class that simply can’t get things—or as many things as they would like. All Chinese good are going overseas. They are too expensive in China, as a result.
The imbalance in trade means that the middle class really doesn’t have as much income as they would otherwise have. Therefore they can’t buy American goods. They are subsidizing Americans by taking lower salaries (except it isn’t their choice).
These are distortions in the market that lead to behavior that would not otherwise occur. It creates perverse incentives, which are generally bad. Eventually, the yuan must be set free, and it will be, but not before a lot of unfortunate things happen in the economy, such as a lengthened recession.